The Medicare Prospective Payment System (SNF)

September 20, 1999

Payment System Prior to July, 1998: Retrospective and Cost-Based

Until July, 1998, nursing homes used to be reimbursed for care provided to Medicare Part A-covered residents residing in Medicare-certified beds through a retrospective cost-based system. The rate received by a nursing home for a Medicare covered resident was based on three components:

Routine costs: These consisted of the services included in the facility's daily charge;

Ancillary costs: These key charges were those that were directly attributable to individual resident care needs, such as therapy, drugs and lab charges. Physical therapy, for example, was covered separately by Medicare based upon a determination regarding medical necessity. There was, therefore, a fiscal incentive for nursing homes to provide such therapy to Medicare Part A covered residents;

Capital costs: costs of land, buildings and equipment.

Prospective Payment System (PPS) Mandated as of July 1, 1998

The Balanced Budget Act mandated a prospective per diem rate for the Medicare SNF benefit. All three components which comprised the previous rate are folded into the new prospective rate. The prospective rate is based upon a case-mix system, with the reimbursement premised upon measuring the type and intensity of the care required by each resident and the amount of resources which are utilized to provide the care required.

To arrive at this measure, a classification system based upon resident acuity, called Resource Utilization Groups (RUGS-III), is used to place each Medicare-coverable resident into one of 7 major classifications and then into one of 44 categories. The classifications are mutually exclusive, meaning that every resident can be placed into one classification and no resident fits into more than one classification.

The process of placing residents into the RUGS-III classifications requires accurate and comprehensive information-gathering about a resident's characteristics and needs. This is a critical component of a RUGS classification because the RUGS classification has implications for both reimbursement and Medicare coverage.

Impact on Nursing Home Reimbursement

The RUGS classifications are hierarchical, with the higher categories providing greater reimbursement. The prospective reimbursement rate is being phased in over a three year transition period. Depending upon when a facility's cost reporting period ends, the phase-in begins either beginning October 1,1998 or January 1,1999. During the first year of implementation, the old facility-specific rate accounts for 75% of a facility's reimbursement with the prospective calculation accounting for 25% of a facility's rate. In the second year of operation, these percentages change to 50% each and in the third and final transition year, the respective percentages are 25% and 75%. By the fourth year, the entire reimbursement rate will be prospectively determined.

The Seven Major RUGS Categories

The seven major RUGS categories, in hierarchical order based upon intensity of resource utilization, are:

1. Rehabilitation (14 classifications)

2. Extensive Service (3 classifications)

3. Special Care (3 classifications)

4. Clinically Complex (6 classifications)

5. Impaired Cognition (4 classifications)

6. Behavior Only (4 classifications)

7. Decreased Physical Function (10 classifications)

There are 26 RUGS classifications within the first 4 major categories. These convey a presumptive Medicare coverage status at this time. The remaining 18 classifications are contained within the 3 lowest major RUGS categories.

Impact on Medicare Coverage: A Presumption of Medicare Coverage for "Upper 26"

The Health Care Financing Administration has announced that residents who are classified in the top 26 classifications are presumed to automatically meet the Medicare coverage criteria.

One might assume that a Medicare beneficiary who is classified into one of the top 26 RUGS categories would have an easy time with SNF placement. However, there appear to be barriers to SNF admission for some Medicare beneficiaries in the top 26 RUGS. These barriers appear to be caused by the high cost to SNFs of caring for certain groups of individuals seeking SNF admission. The common characteristics shared by those experiencing increasing difficulty gaining admission to SNFs include patients who meet the SNF coverage criteria, but who also require :

Kidney dialysis, with round-trip ambulance transportation to a dialysis center thee times a week;

Radiation therapy, with round trip ambulance transportation;

Fitting of a prosthesis;

Certain types of chemotherapy or other intravenous medications.

All of the costs of providing the services needed by those groups are subsumed in a SNF's Medicare prospective per diem rate. Many SNFs have informally communicated a reluctance to accept such individuals when Medicare is the apparent payment source, because of the costs involved. As a result, it appears that individuals who have these needs encounter difficulties to obtaining SNF placement.

By What Standard Will Those Classified in the "Lowest 18" Be Evaluated?

For residents who are classified in the lowest 18 classifications, no presumption of coverage will be applied. These residents will have their care needs reviewed on a case-by-case basis for the purpose of determining if Medicare coverage can be established. The Health Care Financing Administration announced in promulgating the new Medicare skilled nursing facility reimbursement regulations, that "existing administrative criteria@ should be used to evaluate whether or not a resident requires daily skilled care, the legal standard for Medicare coverage.

Three of the most critical nursing activities that can invoke Medicare coverage included in the administrative criteria are as follows:

2. Observation and assessment of the patient's changing condition. (This includes identifying and evaluating the patient's need for modification of treatment or for additional medical procedures until the condition stabilizes.) ( 42 CFR 409.33(a)(2));

3. Patient education services ( 42 CFR 409.33(a)(3 ) ).

Importantly, while these provisions were deleted from the regulations in July, 1998, they were reinstated by federal regulations issued in July, 1999. In reinstating these provisions the Secretary noted:

Our reason for deleting the explicit references in the regulations to management and evaluation, observation and assessment, and patient education was not that they no longer represented appropriate examples of skilled care, but rather, because we believed that these separate references were no longer necessary in view of the clinical indicators that have been incorporated into the upper 26 RUG-III groups. However, in order to avoid possible confusion on this point, we are accepting the commenters= suggestion to reinstate these categories as specific examples in the SNF level of care regulations. 64 FR 41670 (July 30, 1999).

In an April 28, 1999 letter to the Center for Medicare Advocacy regarding the deleted examples of skilled nursing, Nancy-Ann Min DeParle, the Administrator of the Health Care Financing Administration, also made this important point:

…we did not intend that our deletion of care plan management/evaluation, observation and assessment and patient education would indicate that we no longer regard these services as appropriate examples of skilled care.

Advocates should remember these important coverage rules and the Administration's commentary when seeking benefits for skilled nursing facility patients in order to insure that they obtain the Medicare coverage to which they are entitled. This is particularly true when advocating on behalf of patients whose need for daily skilled nursing services may not be identified through the process of establishing a RUGS classification.